purpose of a Qualified Domestic Trust (known as a QDT or QDOT) is to preserve the marital deduction
when the surviving spouse is not a United States citizen and the trust assets
are likely to be subject to the federal estate tax if the marital deduction is not
The Marital Deduction: This
deduction allows transfers of unlimited amounts of assets between spouses at
death, but only if they are United States citizens. The result is that the surviving spouse does not have to pay
any tax on the estate of the first spouse to die, provided the surviving
spouse is a citizen of the United States. The marital deduction only
postpones the federal estate tax on the estate, and, in some cases, may cost
a married couple additional taxes if there are no other provisions to reduce estate
taxes. Click here for additional information:
A-B Trusts The marital deduction is an
important estate planning tool, and is useful in deferring taxation possibly
for many years after the death of the first spouse.
The Problem for Non-Citizens:
If a married couple has an estate that is greater than the $5.25 million estate tax
exemption, and one or both of them are not
citizens, they need a QDT to avoid estate taxes on the death of the first
spouse. For estates that are less than those amounts, no QDT is needed
because no federal estate tax will be due. In other words, the first
spouse to die will use his or her exemption of $5.25 million to transfer his
or her estate to the surviving spouse, and the marital deduction will not be
However, for estates greater than those amounts, no
marital deduction will be allowed if the surviving spouse is not a U.S.
citizen and does not become a citizen by the time that the estate tax return
is filed. Depending on the type of estate plan that the couple has,
lack of a marital deduction could result in substantial estate taxes on the
first death. This can be avoided if the assets are
transferred to a Qualified Domestic Trust (QDT).
Requirements for a QDT:
To qualify as a QDT, a trust must meet the following requirements:
|At least one trustee must be a U.S. bank.
|No distribution can be made from the trust, except
for income, unless|
the trustee who is the U.S. citizen or corporation has
the right to
withhold estate taxes from the distribution.
|The trust must meet Treasury regulations regarding
the collection of any tax.|
|The executor must elect on the estate tax return to
treat the trust as a QDT.|
After the death of the surviving spouse, the assets in
the QDT are subject to the estate tax as though they were included in the
estate of the first spouse to die. These assets are not included in
the surviving spouse's estate.
Income distributed from the QDT to the surviving
spouse is subject to income tax, but not estate tax. However, when
principal is distributed from the QDT to the surviving spouse it is subject
to estate tax, unless the distribution is made for hardship reasons.